Bankruptcy and Taxes

When it comes to taxation and bankruptcy, there is good news and bad news. The good news is you can eliminate taxes when you file for bankruptcy. The bad news is you can only eliminate certain taxes when you file. Let’s examine the bankruptcy law and see exactly which of your taxes can be eliminated and which you will still owe after you file.

Not all Taxes Are Created Equal

Some taxes, by their very nature, are simply not dischargeable in bankruptcy under any circumstances. These include:

  • Payroll tax if you are self-employed
  • Sales taxes that were collected via your business but not actually paid out to the government
  • If you committed fraud or evasion when filing taxes, they cannot be eliminated

Timing Is Everything

The rest of your taxes can potentially be eliminated when you file for bankruptcy. Whether or not they are eligible for elimination hinges exclusively on issues of timing. Here is the time-based formula for figuring it out:

1)      What years are the taxes from? The taxes had to be due at least 3 years before the date of filing your bankruptcy. If they are newer than that, you can wait to file your bankruptcy, or file knowing that they will not be discharged when you file. Remember, although April 15th is the typical due date for income taxes, the date may be later if you filed an extension.

2)      Even if you qualify under step 1) above, the taxes must have been actually filed and accepted at least 2 years ago or more.

3)      Finally, you must pass one more hurdle for your taxes to be discharged. It must be at least 240 days since the taxing authority “assessed” your taxes. This means either 240 days from when they mailed the notice informing you that you owed the taxes or 240 days from when they audited your taxes. If they have not yet done an audit, then this 240 day rule does not apply.

In addition to these rules, there are a few other, relatively rare legal nuances that apply in a handful of tax debt cases. It is best to consult with an experienced bankruptcy attorney about these matters before filing your case.

If you have further questions about filing for bankruptcy, ask one of our lawyers in the field at the top of the page